SPEAKING
FREELY Japan: Tax
matters By Bert Edstrom
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(Large parts of
Japanese public life will grind to a halt unless
lawmakers manage to break a political deadlock and
pass a new financing bill, Prime Minister
Yoshihiko Noda warned Monday. In an appeal for
cross-party consensus Noda said at the start of an
extraordinary session of parliament that the
day-to-day running of government will seize up
without agreement on the bill allowing Tokyo to
issue new bonds to cover its spending. -
Agence France-Presse, October 30, 2012.)
On Monday, September 10, the leader of the
party likely to win
Japan's next general
election, Sadakazu Tanigaki of the Liberal
Democratic Party (LDP), threw in the towel in a
surprise move. He had repeatedly expressed his
intention to run in the election for party
president and had a fair chance to be re-elected.
He was also likely to secure a victory for his
party in the upcoming election, and become prime
minister. Tanigaki's resignation made others see
the writing on the wall, not least Prime Minister
Yoshihiko Noda. And the root cause of his fall was
Noda's decision to raise taxes.
A rule of
thumb in Japanese politics is that a prime
minister who proposes a tax increase will not be
long-lived. In fresh memory are prime ministers
who came up with just such an idea and fairly soon
had to look for another job.
In Japan, the
only tax increases that seem to be generally
accepted are those on spirits or tobacco, as in
most Western countries. Thus, a golden rule for a
Japanese prime minister who harbors the idea to
propose a tax increase is to tread cautiously.
Against such a background, Prime Minister
Noda must be said to have been acting boldly. Soon
after he assumed his office on September 2 last
year he declared that he intended to double the
sales tax to 10%. Despite steadfast resistance
from large parts of his own party, the Democratic
Party of Japan (DPJ), other parties, and the
general public, he did not waver. And he reached
his goal. On June 26 the tax increase legislation
passed the Lower House and on August 10 the Upper
House took a similar decision, deciding that the
5% sales tax will be increased to 8% in 2014 and
10% in 2015.
Dramatic
consequences The consequences for Noda
himself, his party and his government are likely
to be dramatic. Some of them have already
materialized. The powerful Ichiro Ozawa, former
chairman of the DPJ and still the kingpin, left
the party on July 3 together with 49 other MPs and
launched a new party. He accused Noda of having
deceived the Japanese people by not acting in
accordance with the DPJ's 2009 election manifesto.
Ozawa was the strategist behind the DPJ's
landslide victory, and wanted the party to keep
its promise not to raise taxes.
Ozawa's
move was a blow to the power position in the
Japanese parliament of not only Noda but also the
DPJ and the coalition government. In order to make
it possible for parliament to take a decision when
a large section of his own party revolted, Noda
joined forces with two opposition parties, the LDP
and the Komeito. But in order to make them vote
for the tax rise, Noda had to promise to call for
new elections. He promised to do so "soon". A
debate is raging now on what exactly this "soon"
means. (Riichiro Kato and Keita Ikeda writing in
the Yomiuri Shimbun on October 31 said that a
by-election victory on Sunday by a Liberal
Democratic Party candidate "is likely to reinforce
the view within the ruling party that any
dissolution of the lower house for a general
election should be delayed as long as possible".)
Polls in recent months have shown that the
popularity of Noda and the parties in the
government is at a nadir. Thus, it is a fairly
reasonable prediction that Noda and his party will
have to hand over power to an opposition, led by
the LDP, following the upcoming election. All
polls indicate that the election will be close to
catastrophic for Noda's party.
It seems
Noda will repeat the feat of Tomiichi Murayama, a
social democrat who led that government in the
mid-1990s in such a way that his party went from
having been the second-largest party in the
parliament for decades, to being close to
annihilated; it was halved in the 1993 elections
(from 142 to 70 seats) and won only 15 seats in
the 1996 election.
A question in need
of an answer Why has Noda been acting in a
way that will ruin not only his own position as
prime minister but will most likely result in a
horrendous election defeat for his party?
It might be the case that Noda is only too
aware of how precarious Japan's economic situation
is. In September, the government announced plans
to cover about 38 trillion yen (US$476 billion) of
the general account budget worth some 90 trillion
yen by issuing deficit-covering bonds (The Japan
Times), that is, a whopping 42%.
Heavy
borrowing has made Japan's outstanding debt equal
to 214% of GDP - the largest by far of Western
countries.
Floating bonds to cover up to
50% of governญmental expenditures, as has been
done in Japan in recent years, is not healthy for
any country. That it is possible to do so year
after year in the case of Japan is only because
the Japanese people are rich and domestic savings
are sizeable.
But finance ministry
bureaucrats realize that there's a limit to
borrowing, and that this limit creeps closer with
every year that passes with nothing being done
about the heavy borrowing of the Japanese
government. It is well-known that the top
officials of the ministry are convinced that it is
absolutely necessary for Japan to increase taxes.
Like his predecessor Naoto Kan, Noda came
from the post of finance minister. Maybe the
ministry's top bureaucrats scared Noda, as they
had done with Kan, to come up with a proposal of a
tax increase. Maybe Noda is resolved to succeed
where Kan failed.
It might also be that
Noda intends to act in a way similar to one of his
predecessors, Junichiro Koizumi (2001-06). After
having met decisive resistance to his key policies
both in the parliament and in his own party,
Koizumi played the strong hand that a prime
minister has - the power to dissolve the Lower
House and call for general elections. Acting
decisively, Koizumi threw out his opponents from
his party and had it put up candidates who
supported the prime minister against his foes
within the party. The result is well known. The
2005 election became a landslide win, not for the
ruling LDP, but for Koizumi, who emerged from the
election with a solid majority and an annihilated
opposition.
The problem for Noda is that
he is no Kozumi. While Koizumi was a master of
taming both media and voters, Noda is a fairly
dull politician. With the image of a bureaucrat,
he lacks Koizumi's charisma. Noda knows this.
It's the results that
count Thus, most likely it seems to me, is
that Noda has made a calculation and will act as
the skilled bureaucrat he is seen as. Of course he
knows how utterly unpopular a tax increase would
be and is painfully aware of the dismal fate of
his predecessors who spoke up for tax increases
and soon found themselves no longer premier.
But there is potential for a significant
pay-off. With the financial resources that will
come with such a tax increase, Noda and his
government could break the long row of lackluster
governments, loosen the purse-strings and start to
deliver on their promises. Presenting voters with
tangible achievements and results is likely to be
seen by him to be the key to secure prolonged
trust from the electorate.
Of course Noda
knows that he will have to go, but he knows that
his successor can reap the benefits. More
importantly, he knows that he will secure for
himself something dear to any politician in Japan,
earning a place in the annals of Japan's history
as a rare creature among Japanese prime ministers
- a do-er.
Bert Edstrom is a
Senior Research Fellow with the Institute for
Security and Development Policy (ISDP), Stockholm,
Sweden. This piece is a revised version of a
Policy Brief for ISDP. The opinions expressed are
those of the author and do not necessarily reflect
the views of ISDP or its sponsors. www.isdp.eu.
Speaking Freely is an Asia Times
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